The Unexpected Upsides of our Employee Ownership
Bill Roark, Starfish Holdings, Inc.
June 11, 2019
When we co-founded our Evergreen company, Torch Technologies, a government defense contracting business, we knew from day one that we wanted our employees to have an ownership interest in the company.
As a manager at a previous company that had been acquired and reorganized, we had experienced some of the negative outcomes of that scenario—namely not being able to follow through with incentives promised our team when new leadership assumed control. Living through that transition was tough. We didn’t want to treat people that way.
I ultimately left that business, and I had the opportunity to work for an ESOP (Employee Stock Ownership Program) company in a subsequent role. I really liked the ESOP culture; its values of transparency and inclusion fit my personal philosophy and leadership mindset. So, in 2002, when I decided I wanted to hang my own shingle, my co-founder Don Holder and I committed to becoming an ESOP as soon as we had 50 employees.
We hit that 50-employee mark in 2004, and we launched the ESOP. In 2011, we became 100 percent ESOP. At that point, our earnings went up by 40 percent because we were no longer paying income tax. Initially, we put those earnings in the bank, where they earned very minimal interest. In 2014, I saw the opportunity to do something a little different—to create a new business structure that has served our employee-owners incredibly well.
At the time, we leased our headquarters location in southeast Huntsville, Alabama. The building sat next to another then-empty 40,000-square-foot office building. I pitched to the board to create a real-estate holding company to purchase the two buildings. I knew that if the buildings were owned by a third party in the business of commercial real estate, we could get reimbursed for the rent on our contracts. It would be an opportunity to invest the cash we had been accumulating and benefit from a higher return than the one or two percent that the bank could offer.
We started to look at how that structure would serve the ESOP, and we worked steadily through the process with our attorneys and with external advisors. As an employee-owned company, it was vital that we protect the ESOP and our retirement plan—that’s why we exist, after all. Real estate investing can be risky, and our board approached the prospect very conservatively and completed a lengthy due diligence process. We didn’t want to rush—we wanted to do things right, for the long-term, rather than chase short-term profit.
In 2014, we created Starfish Holdings, Inc., a S-Corp owned by our ESOP. We then restructured such that Starfish currently holds 100 percent ownership of Torch Technologies, Inc. and of our new company Freedom Real Estate and Capital, with the goal to grow the retirement portfolios of our employee-owners.
Upon founding Freedom Real Estate and Capital, we purchased the headquarters building we had been leasing and the building next door. Since then, we have purchased nine additional commercial buildings in Huntsville. From the beginning, we committed to doing this with minimal or no leverage. We paid cash for our initial investments. Today, we own over $40 million of paid-for real estate, and we have begun to leverage a bit, but this remains minimal. We have also constructed two new commercial buildings and have paid cash as we go for both projects.
This unique structure has created a lot of value for our employees. We’re seeing double digit returns on the investments, plus the appreciation of the property values. And, should we experience a decrease in stock price as the result of a lost contract, the real estate serves as an anchor the help hold the value of the company.
There’s no doubt the economic upside for our employee-owners had been tremendous, and there has been an additional—unexpected benefit: the economic revitalization of our hometown. This has been apparent in southeast Huntsville, specifically, where our original office building was located. Through our purchase of that building and several more in the immediate area that were standing empty, we have brought hundreds of jobs and commerce back to a part of town that was economically depressed. As we’ve grown and filled buildings, restaurants, grocery stores, and residential areas have grown up around our properties. As a civic-minded company with a deep commitment to our community, this result has been especially rewarding. We are grateful for the success we have enjoyed, and we want to share that success with our city.
The opportunity to serve our employee-owners and the community of Huntsville has been extremely gratifying. When I see a Torch retiree in the grocery store who is thrilled to tell me about how he or she is making the most of their retirement or a restaurant owner in our neighborhood who is grateful for the business provided by our employees, that’s really special. You can’t really put a value on that kind of return on investment—in people and in property.
Bill Roark is CEO of Starfish Holdings, Inc.